RTC #7: Decoding startup valuation

Why today’s issue is valuable to you 💎

1. Amazon drops the deal, Y Combinator president is in trouble on X, quant squads of data-driven PEs, and how to fire a VC

2. Decoding startup valuation: Simplified insights and hands-on guidance from Paul, founder of the leading business valuation software Valutico

3. The latest capital raisings you should know about

Headlines 📢

• How to fire a VC: Over the last year investment firms grew their headcount, and many want to slim down now

• And how much do the ones earn that stay: 2023 Venture Capital Salary Survey

• Amazon drops $1.4bn deal to buy iRobot and pays a $94m break fee to iRobot, which immediately announced plans to axe 31% of its workforce and the departure of its chief executive

• Y Combinator President Garry Tan publishes a menacing tweet before deleting it, apologizing: ‘Die slow motherf*****’

• Elon Musk’s AI startup seeks to raise $6bn from investors to challenge OpenAI

• FTC investigating AI deals and investments with big tech firms, including Microsoft, Amazon, and Alphabet (In 2023, ~8% ($25+ billion) of the total venture capital raised in North America came from these three plus Nvidia)

• Lightspeed (VC) plans to roll holdings into continuation fund as sector seeks ways to return cash to investors

• Data-driven PEs: Quants Revolutionize $10 Trillion Private Equity Game

  👉 Quants are experts in quantitative analysis

🤿 Deep Dive: Decoding startup valuation

It's the question every founder faces, no matter the company size. What's my startup worth? From my days in Deutsche Bank's M&A team, I've seen this challenge at every level. CEOs of large companies wrestle with it just as much as startup founders.

How do we value what we've built? This is not just your struggle; it's a universal one. So, how do you put a price tag on your vision and hard work?

Valuation – it's more art than science, and yet it drives every funding conversation. But here is the truth: there's no one-size-fits-all answer.

It feels like that you can only do wrong 👇

“Nothing turns off an investor more than when an entrepreneur comes in with a ridiculous valuation.”
(Kevin Harrington, former panel member on Shark Tank)

Yet so simple when said by Peter Thiel 👇

“Simply stated, the value of a business today is the sum of all the money it will make in the future.”
(Peter Thiel, billionaire entrepreneur, and venture capitalist)

That's why I've brought in Paul, a master in cutting through valuation complexities, to make this as clear as day for us.

Curtain up for hands-on insights you don't find in any textbook 💥💥💥

👉 Valuation for “Beginners”  

RTC: “How would you explain “valuation” to a five-year-old in one sentence?”

Paul: “It’s been said that “price is what you pay, and value is what you get”. So valuation is the process of calculating what something is worth.”

RTC: “When do you usually execute a “company valuation” and in what situations is it important to know the company value?”

Paul: “People typically think of equity fundraisings and M&A as the most frequent situations, but the reality is that companies need valuations for many different reasons: Shareholder value-based management, strategic planning, investor relations, employee share ownership plans, tax and regulatory compliance, insurance purposes, inheritance and business succession, shareholder disputes, etc.”

👉 Valuation on the ‘Road-To-Capital’

RTC: “How does the approach to valuation differ between early-stage and later-stage financing rounds?”

Paul: "A good valuation combines “numbers” and “narrative” and you can’t really have one without the other. But I’d say that for early-stage companies the “narrative” part is more important (what’s the vision, what does the team look like, can they execute it, etc), whereas for more mature later-stage companies the pendulum swings to the “numbers” part.

Due to the “laws of financial gravity” a company can only sell a vision and narrative for so long because at some point investors will want to see this reflected in the “hard” numbers.”

RTC: “What are the 1-2 key valuation metrics and factors investors consider that differ from Private vs Public markets?”

Paul: ”A large part of modern valuation theory is based on assumptions that only hold for big mature companies in public markets (e.g. the capital asset pricing model), so the important thing when doing private market valuations is to make suitable adjustments where necessary (e.g. for risks such as lack of liquidity or marketability).”

RTC: “What was a (prominent) transaction that ”surprised” you regarding its valuation?”

Paul: ”Too many to count :-) But generally, you will see new hypes every couple of years and, remarkably, people don’t seem to learn from the past. How private companies can go from unicorn status to selling for a few million practically overnight is wild. I think especially the private markets could do with more transparency and objectiveness around valuations, which by the way is exactly what our company Valutico is trying to solve!”

👉 Valuation and Fundraising Strategies

RTC: “Being a founder yourself, how should startups strategically approach valuation during fundraising?”

Paul: ”Difficult topic! Because startup valuation is so much based on the “narrative” and thus even more “art than science” people can come to vastly different conclusions regarding valuations.

In all fairness, startup “valuation” isn’t really valuation at all, but rather “pricing”: How much money do I need, to prove a certain hypothesis until the next fundraise, and what am I willing to give up in terms of shares? So in other words: Where does demand meet supply, which is the outcome of a negotiation, but not really the analytical process we call “valuation”.

The short answer: If you want to optimize for the highest possible valuation, try to have a broad funnel and get as many term sheets as possible. Easier said than done!”

RTC: “At what stage would you advise to hire a corporate finance advisor to support you on the valuation?”

Paul: ”I am probably hurting my own business by saying this, but the answer is that it’s almost always a waste of money in the early stages of a company. By the way, the same is true for advisors during the fundraising process: In most cases, this will actually hurt you as investors don’t like to talk to advisors.”

💡Additional in-depth insights on startup valuation

• Median valuations & dilutions from Seed to growth (Carta)

• Median valuations of early-stage startups (AngelList)

• Funding Benchmarks from pre-seed to Series A (Founder Institute)

• Deal insights: how to value a startup business (PwC)

• Valuing startup ventures (Investopedia)

💸 The latest capital raisings you should know about

Early Stage

👉 Top 3 transactions in USA

• Quantinuum, an integrated quantum computing company, has raised $300m in a Series A round led by JPMorgan Chase
• Lykos Therapeutics, a provider of psychedelic medicines and therapies, has raised $100m in a Series A round led by Helena
• Fullcast, a platform that allows companies to manage and track the performance of each of their revenue-generating teams, has raised $35m in a Seed round led by Epic Ventures

👉 Top 3 transactions in Europe/UK

• Calluna Pharma, developer of therapies for inflammatory and fibrotic diseases, has raised $75m in a Series A round led by Forbion
• Qdrant, an open-source vector database, has raised $28m in a Series A round led by Spark Capital
• DISCO Pharmaceuticals, a biotech company based in Zurich, has raised $22m in a Seed round led by Sofinnova Partners

👉 Top 3 transactions in Asia/MENA

• HashKey Group, a leading end-to-end digital asset financial services group in Asia, has raised $100m in a Series A round led by OKX Ventures
• Puhua Basic Software, a basic software development platform that offers real-time embedded operating systems, has raised $63m in a Series A round led by Chongqing High-tech Zone Development And Investment Group
• Sakana AI, a new AI research company based in Tokyo, has raised $30m in a Seed round led by Lux Capital

Later Stage VC / PE

👉 Top 3 transactions in USA

• Vantage Data Centers, an operator of large-scale data centers, announced $6.4b equity investment led by DigitalBridge and Silver Lake
• TriMark USA, a restaurant supply company and provider of food service supplies, closed $350m equity investment led by Ares Management, Oaktree Capital Management and Bayside Capital
• Everphone, a leading Device-as-a-Service platform for corporate smartphones and tablets, has raised $297m in a Series D round led by Citigroup, Phoenix Insurance, and KfW

👉 Top 3 transactions in Europe/UK

• Picnic, a Dutch online grocery store, raised $390m equity investment led by Edeka and The Bill and Melinda Gates Foundation Trust
• Electra, a Paris-based EV-charging startup, raised $333m in a Series B round led by Duch pension fund PGGM
• Doc.com, a portal to healthcare services and drugs optimized with blockchain and AI, announced $300m equity investment led by Silver Rock

👉 Top 3 transactions in Asia/MENA

• Qiyuan, a green energy solutions provider, raised $211m in Series B round led by Zhuhai Gree Financial Investment and Power Construction Corporation of China
• Silicon Box, a semiconductor company, raised $200m in Series B round led by Praesidium Capital, Maverick Capital and BRV Capital
• Aqua Security, developer of cloud-native security solutions, raised $135m in Series E round led by ION Crossover Partners

This was it for today!

If you found it valuable, let a friend know.  

See you next Tuesday,
Stephan 👋

Issue #7 | 30 January 2024